Brexit and frustration of a contract
Canary Wharf v European Medicines Agency [2019]
In the context of the ongoing Brexit negotiations, issues were always going to arise as to the effect of Brexit on ongoing commercial contracts. This was the first case of its kind where the EMA tried to claim that its long lease in respect of offices at Canary Wharf had been frustrated by Brexit
Facts:
Frustration is a doctrine under which a contract may be discharged when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract. The contract is automatically discharged if a frustrating event occurs and the parties are no longer bound to perform their contractual obligations.
In 2011 Canary Wharf as landlord signed two agreements (an agreement for lease and a construction management agreement) for then unbuilt premises in Canary Wharf with the EMA. The parties subsequently signed a 25-year lease in October 2014.
In August 2017, the EMA wrote to the landlord saying that "if and when Brexit occurs, we will be treating that event as a frustration of the Lease". In 2018 the EU ordered the EMA to relocate its headquarters to Amsterdam. The landlord subsequently commenced proceedings to seek a declaration that the Lease would not be frustrated by the UK's withdrawal from the EU.
Decision:
The court held that the Lease would not be discharged by frustration on Brexit. The judge concluded that there are no restraints on the EMA which legally prevent it having its headquarters in a country outside the EU. While the 2018 Regulation legally obliged the EMA to move to Amsterdam, it had not arisen by any legal necessity as a result of the EMA's lack of capacity to act in the territory of a third country.
The judge also found that the Lease was not frustrated by the failure of a common purpose. It effectively held that there was no ‘common purpose’. The parties' purposes were not common, but divergent. The EMA was focused on bespoke premises with the greatest flexibility as to term, and the lowest rent. The Landlord was focused on long-term cash flow, at the highest rate of rental.
Points to Note:
- The case will almost certainly be appealed.
- The decision is highly fact specific and so may not act as much of a precedent for other situations. However, what it does indicate is that the hurdle to overcome in order to successfully invoke the doctrine of frustration is a very high one.
- When the original agreements were signed back in 2011 the judge found that Brexit was not a ‘reasonably foreseeable event’. Evidence suggested that it was sometime around 2016 that EMA’s lawyers first began considering "Brexit clauses". Somewhere during that period would be the cut-off point when the judge felt that the possibility of Brexit should have informed the manner in which the parties framed their agreement – in other words the possibility of Brexit should have been explicitly addressed.